1010 Audit ToRs FINAL

Lindsay Heath

Description

GUIDANCE NOTE 101017  October 2010 ICSA Guidance on Terms of Reference Audit Committee Contents If using online, click on the headings below to go to the related sections. A Introduction B The UK Corporate Governance Code C Notes on the terms of reference D Model terms of reference Page 1 GUIDANCE NOTE 101017  October 2010 A Introduction This guidance note proposes model terms of reference for the audit committee of a company seeking to comply fully with the requirements of the UK Corporate Governance Code, published June 2010 (the Code). It draws on the experience of company secretaries and is based on best practice as carried out in some of the UK’s top listed companies. Companies with additional primary listing(s) may need to amend the terms of reference in light of additional requirements in the relevant country, in particular the US Sarbanes-Oxley Act. B The UK Corporate Governance Code The Code states that: ‘The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an 1 appropriate relationship with the company’s auditor.’ It goes on to clarify that, in practical terms, this means that: ‘The board should establish an audit 2committee...’. The Code recommends that the main role and ...

Informations

• Publié par: Mephor
• Nombre de lectures: 25
• Langue: English

Extrait

Page 1

ICSA Guidance on Terms of Reference Audit Committee Contents If using online, click on the headings below to go to the related sections. A Introduction B The UK Corporate Governance Code C Notes on the terms of reference

D Model terms of reference

GUIDANCE NOTE 101017October 2010

GUIDANCE NOTE 101017October 2010

A Introduction This guidance note proposes model terms of reference for the audit committee of a company seeking to comply fully with the requirements of the UK Corporate Governance Code, published June 2010 (the Code). It draws on the experience of company secretaries and is based on best practice as carried out in some of the UK’s top listed companies. Companies with additional primary listing(s) may need to amend the terms of reference in light of additional requirements in the relevant country, in particular the US SarbanesOxley Act. B The UK Corporate Governance Code The Code states that: ‘The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an 1 appropriate relationship with the company’s auditor.’ It goes on to clarify that, in practical terms, this means that: ‘The board should establishan audit 2 committee...’. The Code recommends that the main role and responsibilities of the auditcommittee should be ‘set out in 3 written terms of reference’and be made ‘available’(e.g. by including them on a website maintained by or on 4 behalf of the company). In addition, it recommends that the work of the committee should be described in a separate section of the 5 annual report and that the committee chairman should attend the AGM to answer any questions on the 6 committee’s area of responsibility.So, as with most aspects of corporate governance, companies are required not only to go through a formal process of considering their internal audit and control procedures and evaluating their relationship with their external auditor, but to be seen to be doing so in a fair and thorough manner. As part of this process, it is essential that the audit committee is properly constituted with a clear remit and identified authority. C Notes on the terms of reference

7 The FRC Guidance on Audit Committees recognises that‘audit committee arrangements need to be 8 proportionate to the task, and will vary according to the size, complexity and risk profile of the company’. As regards the composition of the committee, we have followed the Code and recommend a minimum of 9 three independent nonexecutive directors (although two is permissible for smaller companies). The board 10 should satisfy itself that at least one member of the committee has recent and relevant financial experience. We have made specific recommendations that others may be required to assist the committee from time to 1 The Code C.3 2 The Code C.3.1 3 The Code C.3.2 and FSA Rule DTR 7.1.3 R 4 The Code C.3.3 (see footnote 7 to the Code). 5 The Code C.3.3 6 The Code E.2.3 7 FRC Guidance on Audit Committees, October 2008 available separately from the FRC website www.frc.org.uk. 8 FRC Guidance on Audit Committees, October 2008, para. 1.3. 9 A smaller company is defined in footnote 6 to the Code as one which is below the FTSE 350 throughout the year immediately prior to the reporting year. 10 The Code C.3.1 and also FSA Rule DTR 7.1.1R Page 2

GUIDANCE NOTE 101017October 2010

time, according to the particular items being considered and discussed. Although not a provision in the Code, it is good practice for the company secretary, or his or her nominee, to act as secretary to the committee. The FRC Guidance for Audit Committees states that the audit committee should have access to the services of the company secretariat on all audit committee matters including: assisting the chairman in planning the audit committee’s work, drawing up meeting agendas, maintenance of minutes, drafting of material about its activities for the annual report, collection and distribution of information and provision of any necessary practical support. It also states that the company secretary should ensure that the audit committee receives information and papers in a timely manner to enable full and proper 11 consideration to be given to the issues.In this regard, it is the company secretary’s responsibility to ensure that the board and its committees are properly constituted and advised, and that there is clear co ordination between the board and the various committees. The frequency with which the committee needs to meet will vary from company to company and may change from time to time. The FRC Guidance for Audit Committees states that it is for the audit committee chairman, in consultation with the company secretary, to decide the frequency of meetings. There should be as many meetings as the audit committee’s role and responsibilities require and it recommends there should be no 12 fewer than three meetings each year.

The list of duties we have proposed are those which we believe all audit committees should consider. Some 13 companies may wish to add to this list and some smaller companies may need to modify it in other ways. 14 The Code providesfor a report on the audit committee to be included in the company’s annual report. Such report should include the following: • a summary of the role and main responsibilities of the audit committee •composition of committee, including relevant qualifications and experience • a description of the main activities of the year to:   monitor the integrity of the financial statements   review the integrity of the internal financial control and risk management systems  review the independence of the external auditors, and the formal policy on the provision of nonaudit services   describe the oversight of the external audit process, and how its effectiveness was assessed  explain the recommendation to the board on the appointment of auditors D Model terms of reference Note: square brackets contain recommendations which are in line with best practice but which may need to be changed to suit the circumstances of the particular organisation, or excluded where not relevant to the company or if the company has a separate risk committee. 1. Membership 1.1 The committee shall comprise at least [three] members. [Membership shall include at least one member

11 FRC Guidance on Audit Committees, October 2008, paras. 2.12 and 2.13. 12 FRC Guidance on Audit Committees, October 2008, para. 2.6. 13 example, some companies also require the committee to monitor/make recommendations on the potential implications of legal actions being takenFor  against the company, the adequacy of arrangements for managing conflicts of interest, the expenses incurred by the chairman and treasury management  policies. 14 The Code, C.3.3 and FRC Guidance on Audit Committees, October 2008, para. 5.2.

Page 3

GUIDANCE NOTE 101017October 2010

15 of the risk committee.]Members of the committee shall be appointed by the board, on the recommendation of the nomination committee in consultation with the chairman of the audit committee. 16 1.2 All members of the committee shall be independent nonexecutive directors at least one of whom shall have recent and relevant financial experience. The chairman of the board shall not be a member of 17 the committee. 1.3 Only members of the committee have the right to attend committee meetings. However, other individuals such as the chairman of the board, chief executive, finance director, other directors, the heads of risk, compliance and internal audit and representatives from the finance function may be invited to attend all or part of any meeting as and when appropriate and necessary. 1.4 The external auditor will be invited to attend meetings of the committee on a regular basis. 1.5 Appointments to the committee shall be for a period of up to three years, which may be extended for further periods of up to three years, provided the director still meets the criteria for membership of the committee. 1.6 The board shall appoint the committee chairman who shall be an independent nonexecutive director. In the absence of the committee chairman and/or an appointed deputy, the remaining members present shall elect one of themselves to chair the meeting. 2. Secretary The company secretary or his or her nominee shall act as the secretary of the committee. 3. Quorum 18 The quorum necessary for the transaction of business shall be [two] members. A duly convened meeting of the committee at which a quorum is present shall be competent to exercise all or any of the authorities, powers and discretions vested in or exercisable by the committee. 4. Frequency of meetings The committee shall meet at least [four] times a year at appropriate times in the reporting and audit cycle 19 and otherwise as required. 5. Notice of meetings 5.1 Meetings of the committee shall be called by the secretary of the committee at the request of any of its members or at the request of external or internal auditor if they consider it necessary. 5.2 Unless otherwise agreed, notice of each meeting confirming the venue, time and date together with an agenda of items to be discussed, shall be forwarded to each member of the committee, any other person required to attend and all other nonexecutive directors, no later than [five] working days before the date of the meeting. Supporting papers shall be sent to committee members and to other attendees as appropriate, at the same time.

15 if the board has a separate risk committee 16 Guidance on circumstances likely to affect independence is given in Code pro vision B.1.1 17 Except on appointment, the Chairman of the company is not considered independent. Code provisions A.3.1, B.1.1 and note 5 18 would be preferable for any quorum toAs it is a Code provision that at least one member of the Committee has recent and relevant financial experience, it  include a member with recent and relevant financial experience, whenever possible. 19 The frequency and timing of meetings will differ according to the needs of the company. Meetings should be organised so that attendance is maximised (for example  by timetabling them to coincide with board meetings and/or risk committee meetings if the company has a separate risk committee). Page 4

GUIDANCE NOTE 101017October 2010

6. Minutes of meetings 6.1 The secretary shall minute the proceedings and decisions of all meetings of the committee, including recording the names of those present and in attendance. 6.2 Draft minutes of committee meetings shall be circulated promptly to all members of the committee. Once approved, minutes should be circulated to all other members of the board unless it would be inappropriate to do so. 7. Annual General Meeting The committee chairman should attend the annual general meeting to answer shareholder questions on the committee’s activities. 8. Duties The committee should carry out the duties below for the parent company, major subsidiary undertakings and the group as a whole, as appropriate. 8.1 Financial reporting  8.1.1 The committee shall monitor the integrity of the financial statements of the company, including its annual and halfyearly reports, interim management statements, and any other formal announcement relating to its financial performance, reviewing significant financial reporting issues and judgements which they contain.  8.1.2 In particular, the committee shall review and challenge where necessary   8.1.2.1 the consistency of, and any changes to, accounting policies both on a year on year basis and across the company/group  8.1.2.2 the methods used to account for significant or unusual transactions where different approaches are possible  8.1.2.3 whether the company has followed appropriate accounting standards and made appropriate estimates and judgements, taking into account the views of the external auditor  8.1.2.4the clarity of disclosure in the company’s financial reports and the context in which statements are made; and  8.1.2.5 all material information presented with the financial statements, such as the business review/operating and financial review and the corporate governance statement (insofar as it relates to the audit and risk management). 20 8.2 Internal controls and risk management systems  The committee shall  8.2.1 keep under review the adequacy andeffectiveness of the company’sinternal financial 21 controls and internal control and risk management systems; and  8.2.2 review and approve the statements to be included in the annual report concerning 22 internal controls and risk management.

20 If the company has a separate risk committee review of internal controls and risk management systems could be included in the duties of that committee. 21 Code provisions C.3.2 22 Unless this is done by the board as a whole. Page 5

GUIDANCE NOTE 101017October 2010

23 8.3 Compliance, whistleblowing and fraud The committee shall  8.3.1 review the adequacy and security of thecompany’s arrangements for its employeesand contractors to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters. The committee shall ensure that these arrangements allow proportionate and independent investigation of such matters and appropriate follow up action  8.3.2review the company’s procedures for detecting fraud  8.3.3review the company’s systems and controls for the prevention of bribery and receive reports on 24 noncompliance  8.3.4 [review regular reports from the Money Laundering Reporting Officer and the adequacy and effectiveness of the company’s antimoney laundering systems and controls]  8.3.5 [review regular reports from the Compliance Officer and keep under review the adequacy and effectiveness of the company’s compliance function] 8.4 Internal audit The committee shall 25  8.4.1 monitor and reviewthe effectiveness of the company’s internal audit functionin the context of 26 the company’s overall risk management system  8.4.2 approve the appointment and removal of the head of the internal audit function  8.4.3 consider and approve the remit of the internal audit function and ensure it has adequate resources and appropriate access to information to enable it to perform its function effectively and in accordance with the relevant professional standards. The committee shall also ensure the function has adequate standing and is free from management or other restrictions  8.4.4 review and assess the annual internal audit plan  8.4.5 review reports addressed to the committee from the internal auditor  8.4.6review and monitor management’s responsiveness to the findings and recommendations of the internal auditor  8.4.7 meet the head of internal audit at least once a year, without management being present, to discuss their remit and any issues arising from the internal audits carried out. In addition, the head of internal audit shall be given the right of direct access to the chairman of the board and to the committee 8.5 External Audit The committee shall  8.5.1 consider and make recommendations to the board, to be put to shareholders for approval at the AGM, in relation to the appointment, reappointment and removal of the company’s external auditor. The committee shall oversee the selection process for a new auditor and if an auditor resigns the committee shall investigate the issues leading to this and decide whether any action is required  8.5.2 oversee the relationship with the external auditor including (but not limited to)  8.5.2.1 recommendations on their remuneration, whether fees for audit or nonaudit services and that the level of fees is appropriate to enable an adequate audit to be conducted  8.5.2.2 approval of their terms of engagement, including any engagement letter issued at the start of each audit and the scope of the audit 23 If the board has a separate risk committee whistleblowing and fraud (including the prevention of bribery) could be included in the duties of that committee. 24 If the company has a separate risk committee prevention of bribery could be included in the duties of that committee. 25 If the company does not have an internal audit function, the committee should consider annually whether there should be one and make a recommendation to the  board accordingly. The absence of such a function should be explained in the annual report. 26 If the board has a separate risk committee the duties of that committee could include review of the company’s internal control and risk management systems. Page 6

GUIDANCE NOTE 101017October 2010

 8.5.2.3 assessing annually their independence and objectivity taking into account relevant [UK] professional and regulatory requirements and the relationship with the auditor as a whole, including the provision of any nonaudit services  8.5.2.4 satisfying itself that there are no relationships (such as family, employment, investment, financial or business) between the auditor and the company (other than in the ordinary course of business)  8.5.2.5 agreeing with the board a policy on the employment of former employees of the company’s auditor,then monitoring the implementation of this policy  8.5.2.6monitoring the auditor’s compliance with relevant ethical and professional guidance on the rotation of audit partner, the level of fees paid by the company compared to the overall fee income of the firm, office and partner and other related requirements  8.5.2.7 assessing annually the qualifications, expertise and resources of the auditor and the effectiveness of the audit process, which shall include a report from the external auditor on their own internal quality procedures  8.5.2.8 seeking to ensure coordination with the activities of the internal audit function  8.5.3 meet regularly with the external auditor, including once at the planning stage before the audit and once after the audit at the reporting stage. The committee shall meet the external auditor at least once a year, without management being present, to discuss theauditor’sremit and any issues arising from the audit  8.5.4 review and approve the annual audit plan and ensure that it is consistent with the scope of the audit engagement  8.5.5 review the findings of the audit with the external auditor. This shall include but not be limited to, the following  8.5.5.1 a discussion of any major issues which arose during the audit  8.5.5.2 any accounting and audit judgements  8.5.5.3 levels of errors identified during the audit  8.5.5.4 the effectiveness of the audit The committee shall also  8.5.6 review any representation letter(s) requested by the external auditor before they are signed by management  8.5.7review the management letter and management’s response to the auditor’s findingsand recommendations  8.5.8 develop and implement a policy on the supply of nonaudit services by the external auditor, taking into account any relevant ethical guidance on the matter. 9. Reporting responsibilities  9.1 The committee chairman shall report formally to the board on its proceedings after each meeting on all matters within its duties and responsibilities.  9.2 The committee shall make whatever recommendations to the board it deems appropriate on any area within its remit where action or improvement is needed.  9.3 The committee shall producea report on its activities to be included in the company’s annual report. 10. Other matters The committee shall  10.1 have access to sufficient resources in order to carry out its duties, including access to the company secretariat for assistance as required  10.2 be provided with appropriate and timely training, both in the form of an induction programme for

Page 7

GUIDANCE NOTE 101017October 2010

new members and on an ongoing basis for all members  10.3 give due consideration to laws and regulations, the provisions of the Code and the requirements of the UK Listing Authority’s Listing, Prospectus and Disclosureand Transparency Rules and any other applicable Rules, as appropriate  10.4 be responsible for coordination of the internal and external auditors  10.5 oversee any investigation of activities which are within its terms of reference  10.6 arrange for periodic reviews of its own performance and, at least annually, review its constitution and terms of reference to ensure it is operating at maximum effectiveness and recommend any changes it considers necessary to the board for approval. 11. Authority The committee is authorised

11.1 to seek any information it requires from any employee of the company in order to perform its duties 11.2to obtain, at the company’s expense, outside legal or other professional advice on anymatter within its  terms of reference 11.3 to call any employee to be questioned at a meeting of the committee as and when required 11.4to have the right to publish in the Company’s annual report details of any issues that cannot be 27 resolved between the committee and the board. October 2010

The information given in this Guidance Note is provided in good faith with the intention of furthering the understanding of the subject matter. Whilst we believe the information to be accurate at the time of publication, ICSA and its staff cannot, however, accept any liability for any loss or damage occasioned by any person or organisation acting or refraining from action as a result of any views expressed therein. If the reader has any specific doubts or concerns about the subject matter they are advised to seek legal advice based on the circumstances of their own situation.

© Institute of Chartered Secretaries and Administrators 16 Park Crescent ∙ London ∙ W1B 1AH ∙ phone: [phone] ∙ Fax: [phone] ∙ Web:www.icsa.org.uk

27 FRC Guidance on Audit Committees, October 2008, para. 3.5.

Page 8